Thursday, August 9, 2012

Tax Transparency, California style

California is considering a new bill that would have the FTB "publish a list of the 1,500 largest corporate taxpayers per taxable year, including each taxpayer's tax liability and income apportionment information..." The 1,500 are "as measured by gross receipts, less returns and allowances, that filed a Form 10-K with the federal Securities and Exchange Commission for that taxable year." Industry reps consider this a privacy violation for corporate taxpayers. Maybe, but maybe not. This involves public companies that have disclosure requirements because they are publicly traded, and it involves information they already disclose to the SEC, only with extraneous (non-California) information removed. It's not at all clear to me why public companies need privacy rights when it comes to taxes paid. Why are taxes paid and basic measures of how they are calculated so different than all the other financial information these companies already have to disclose in the interest of illuminating their public shareholders about their financial health?

There is no real difference, but tax disclosure presents a very real social/cultural problem for public companies that are paying very low rates of tax--which apparently includes most or all public companies. The real worry therefore is not a loss of privacy at all but the legitimate worry that sunshine will lead to bad press as data emerges regarding how public companies arrange their tax affairs.

Existing state and federal laws generally prohibit unlawful disclosure or inspection of any income tax return information. ... the FTB may publish statistical data related to taxpayer information so long as nothing specific to a single taxpayer is disclosed. Notwithstanding these provisions, the Legislature directed FTB to publish a list of the top 500 tax delinquencies over $100,000...

ARGUMENTS IN SUPPORT: According to the author's office, this bill will ask for the FTB to post one specific data point on its website which corporations already have: corporation taxes paid to California. It simply disaggregates the amount already reported in their SEC 10-K form to be California-specific. This simple data is urgently needed for several reasons. First, California recently made significant changes in its corporation tax system, adopting "elective single sales factor apportionment." This new system means that corporations have a choice of how to apportion multi-state income to California. The FTB has estimated that this choice will cost the state nearly $1 billion annually, beginning in tax year 2011. With this bill, we will be able to accurately determine the distribution of benefits and costs from this drastic change.

ARGUMENTS IN OPPOSITION: The opposition expresses concerns that this bill will result in misleading information that provides no context for a taxpayer's disposition and will provide no objective evaluation of the single sales factor. For many multi-state corporations, their finality tax liability may not be resolved for years after their return is actually filed so the information in this bill may not be accurate. Furthermore, the opposition states that breeching [sic] taxpayer confidentiality is punitive to the individual taxpayer but will not provide further information to the state to determine whether specific tax policies made sense.

Regarding the "arguments for," I don't know that the legislature's ability to "accurately determine" things requires the data to be publicly disclosed. The legislature could as easily simply require public companies doing business in California to include the information on their confidential tax returns, which are typically available to state legislatures to review in the aggregate for policy purposes. Someone needs to make an argument about why public disclosure is necessary. There are plenty of available arguments, one need only review the CBCR and PWYP campaigns (or you can read my chapter which examines these arguments).

Regarding the "arguments in opposition," I am not sure why the information is misleading unless companies are reporting false or misleading data to the SEC; if that is the case, we have bigger problems. No, it is not that the data is misleading. On the contrary, it is more likely that the data is likely going to be painfully and inconveniently accurate. True, returns are subject to contestation by the FTB. I would submit that in the name of the rule of law, the process and outcome of agency contestation ought also to be public information (it is not, unless the matter ends up in court). But that is no reason why the original claim is somehow misleading, unless intentionally so by the author. It is the company's stated position at the time it is made.

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